Take stock in the summer

There were long intervals that the "Sell in May and Go Away" strategy not only didn’t work, but the results would have been horrible.

By Daniel J. Traub/local columnist

Milford Daily News

By Daniel J. Traub/local columnist

Posted Aug. 26, 2012 at 12:01 AM
Updated Aug 26, 2012 at 10:51 AM

By Daniel J. Traub/local columnist

Posted Aug. 26, 2012 at 12:01 AM
Updated Aug 26, 2012 at 10:51 AM

» Social News

One common Wall Street adage says to "Sell in May and Go Away." The idea is that stocks have historically performed better from November through April than from May through October and that we would be better off not owning stocks at all between May and October. Even if you’ve never heard this saying before perhaps you’ve noticed that many negative periods have occurred in October (1929 and 1987, for example). Let’s test the adage.

I studied the returns for the S&P 500 from May 1926 through April 2012. Over this 86 year period the average six month gain for the November-April period was 7.4 percent whereas the return for the May-October period was 4.1 percent. So it does appear true that returns have indeed been historically better in the winter months. Of course, I don’t know anyone who has held stocks for the past 86 years. Let’s look deeper.

The worst six-month period actually occurred in the November-April window (-42.4 percent in 1932) and the best six-month period occurred in the May-October period (+39.1 percent in 1938).

Further, there were long intervals that the "Sell in May and Go Away" strategy not only didn’t work, but the results would have been horrible.

From November 1934 to October 1942, the November-April return was -42 percent whereas the May-October return was +188 percent.

Can you imagine how you would feel had you implemented this strategy in 1934? It makes me wonder if in 1943 someone tried to coin the phrase, "Sell in the Fall and Go have a Ball," or something equally catchy.

How about something more recent? From October 2003 to April 2008 the November-April return was +18 percent and the May-October return of +40 percent.

Sometimes it was not so much a matter of one interval performing better than the other, simply that the May-October period was profitable on its own.

From May 1947 to April 1956, the November-April return was +146 percent. But the May-October return was also quite attractive at +130 percent.

In the 1980s and 1990s, the returns for November-April were +182 percent and +199 percent, respectively. By comparison, the May-October returns were +82 percent and +72 percent.

Certainly, if forced to choose between investing in only one of these periods between 1980 and 1999 I would select the November-April period. But I don’t have to choose and I’d be pretty happy with the May-October returns as well. Even the 72 percent return in the '90s is equivalent to an average annual return of 11.4 percent.

Overall the May-October period generated positive returns 70 percent of the time (60 out of 86 periods). Given that the magnitude of the average gain/loss was very similar (average gain +10.7 percent, average loss -11 percent) we can think of this like a coin flip stacked in our favor.

In the classic coin-flip game, there is an equal chance of heads and tails. If we bet $10 on heads and flip the coin 100 times, we expect to break even. But if we play with a "fixed" coin that is expected to come up heads 7 out of 10 times (70 percent), then if we bet $10 on heads and flip the coin 100 times our expected outcome is +$400. I can live with that.

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Finally, none of the above statistics take into account the costs of selling every spring. These include trading costs and tax considerations, both of which would dilute the strategy’s effectiveness.

The point is that while the November-April time frame overall has been more profitable, there have been long stretches when that has not been true. And even when it is has been better that does not necessarily lead to the conclusion that the May-October will be bad.

I have no idea if the "Sell in May and Go Away" strategy will work this year (it very well might), or any year for that matter. But I do know that I will be better off not selling more often than not.

Daniel J. Traub is president of Tempo Financial Advisors LLC in Framingham. He can be reached at DTraub@TempoAdvisors.com.